Does the US credit rating cut by Moody’s offer India an opportunity?
Potentially, yes. We could position India as a stable economy under fiscally responsible economic management in world where US budgets continue to balloon and its public debt looks increasingly unsustainable.
There is something ironic about the world’s largest economy being nudged off its pedestal by a credit rating agency whose word it once treated as gospel. The decision by Moody’s to downgrade US sovereign debt from its long-held Aaa status to Aa1 lands like a reality show cliffhanger. This marks the first time in over a century that none of the world’s three major credit rating agencies has a top-tier rating for the US.
America’s debt trajectory has been climbing with the conviction of a mountain goat and grace of a runaway truck. Political brinkmanship over debt ceilings has become something of a domestic ritual. Government shutdowns occur with a regularity that suggests more choreography than crisis.
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Yet, it is worth remembering that Moody’s has only confirmed what most informed observers already knew. What the rating agency has done is strip away the layers of denial that successive administrations, particularly of Donald Trump, have contributed to. It is a bit like watching an addict insist on being in control while the addict’s finances, routines and credibility unravel.
For Trump, who has built much of his political narrative on claims of economic strength and fiscal genius, this development lands awkwardly. That the downgrade came on the same day that his spending bill was blocked by his own party’s fiscally hawkish members only sharpens the irony.
The numbers tell their own tale. Moody’s projects US federal deficits rising to around 9% of gross domestic product by 2035, up from 6.4% next year. This is not driven by military adventurism or pandemic-related spending, but by the more mundane—yet relentless—forces of entitlement expansion, ballooning interest payments and insufficient tax mobilization. Much of this structural imbalance has been worsened by the 2017 tax cuts, estimated to contribute a staggering $4 trillion to the primary deficit over the next decade.
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Here lies the American paradox. Despite its fiscal recklessness, the US is not in any conventional sense broke. The Federal Reserve’s data reveals that household net worth has more than doubled in the past decade, rising by over $83 trillion. The total now stands at nearly $169 trillion—roughly five times the level of the country’s public debt. On paper, this is an astonishing reservoir of economic resilience. But the fine print matters. A good portion sits in illiquid assets, speculative instruments and sectors largely untouched by taxation. The federal government cannot simply reach into this pot without navigating complex political terrain and rethinking its tax architecture.
For India, this moment warrants staying alert. As global investors re-assess risks, emerging markets are likely to feel the pressure. When the US shows signs of fiscal disarray, the rest of us must consider whether our own cushions are thick enough.
India is in a relatively strong position. Economic growth is steady, foreign exchange reserves are healthy and inflation is within the central bank’s tolerance band. Yet, a global flight to safety in response to uncertainty and the like, paradoxically, often results in the dollar strengthening, not weakening. This counter-intuitive twist can trigger outflows from emerging markets, strain equity indices and push the rupee down.
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There is also the matter of capital becoming more expensive, and selectively so. Should US bond yields tick upward in response to the Moody’s downgrade—whether out of investor caution or increased Treasury issuances—the cost of global money will rise with it. Indian corporates and infrastructure players accessing overseas markets could find themselves paying a higher premium—not because of their own risk profiles, but because benchmark rates would have risen.
The real risk, however, lies in the subtle erosion of confidence. The US Treasury has long served as the traditional anchor of global finance, a lighthouse in stormy waters. If that beacon begins to flicker, the sea does not immediately rise, but every ship adjusts course just a little. India’s portfolio managers, trade negotiators and central bankers may all need to recalibrate their instruments.
This week, as an Indian delegation prepares to sit across the table from US trade negotiators to discuss tariff frameworks, the timing could not be more delicate. The downgrade also lands at a time when the US is rethinking its global supply chains and seeking non-threatening trade partners as a buffer against geopolitical volatility. Even as the Trump camp brushes aside the downgrade publicly and continues its posture of fiscal bravado, the broader system around it is taking note.
Tariff discussions are rarely about tariffs alone. As we saw just last week in the US-China trade agreement struck in Geneva, even after months of vocal hostility and competitive posturing, both sides recognized the importance of economic stability over rhetorical escalation. Beneath the surface, trade is often less about commerce and more about signalling strategic seriousness.
In that light, India currently has the opportunity to present itself not just as a valuable trade partner, but a country that brings both political stability and economic traction to the table.
The author is a corporate advisor and author of ‘Family and Dhanda’.
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